Equipment Leasing – the Good, the Bad, and the Ugly

The New Year provides an opportunity for reflection for both individuals and businesses alike. For businesses, it is a time to reassess operations and determine if any changes should be made. Whether it be moving your company, updating your office technology, or renewing or entering into new equipment leases, many companies use this time to plan for the next year.

Typically, companies have three options when acquiring new office equipment technology: (1) pay cash; (2) obtain a loan to finance the equipment; or (3) lease the equipment. Most companies have chosen the last option at some point in their business lives, with eight out of ten American companies using leasing as their preferred method of acquiring office equipment. One of NavBat’s clients has been offering office machine leasing to Southern California businesses for more than three decades. So we asked the President of Velocity Imaging Products, John Stavola, to provide a summary of the advantages and pitfalls of equipment leasing. Here is what he had to say:

There are numerous benefits to leasing, such as: (1) it requires little to no cash out of pocket at the time of acquisition; (2) depending on the type of lease, leases may be considered an operational expense (rather than a capital expense); however, it is always best to consult with your tax professional concerning the means by which you expense an equipment lease; (3) leasing allows a business to hedge against the risk of equipment obsolescence and provides the ability to upgrade equipment as needs change; and (4) customers typically receive much faster customer service when problems arise with the leased equipment than they would if they owned the equipment.

While equipment leases have many significant advantages, business owners should also be equally aware of the common pitfalls that may occur with these leases. At the outset, it is important for customers to understand that equipment leases are commercial leases, meaning they do not have to comply with the truth in lending laws. This is significant because it means that commercial leases can require a business to provide the leasing company with a “letter of intent” within a specific window near the end of the lease in order to avoid automatic lease renewal. In the event this letter of intent is not sent to the leasing company, the lease will go into “evergreen” status (automatic renewal) for a period of time. An example of such language is as follows: “this agreement will renew for 90 days unless you provide a written notice to us between 90 and 150 days prior to the end of the lease with your intent to either purchase the equipment or return it to the leasing company.” Furthermore, the “letter of intent” most likely needs to be sent to the leasing company (with whom the business owner has probably never had any interaction) and not the service provider of the leased business equipment (e.g., a copier/printer). The good news is that these pitfalls can be avoided so long as the business owner reads and understands the terms of the equipment lease before signing it. Make sure to keep a fully executed copy of the written lease agreement to help navigate the proper termination of the lease and the rights and obligations of the business during the term of the lease, and get any important dates on a calendar system that you know will still be in use in the years ahead.

If you need any assistance in reviewing your equipment lease or have any questions about them, the attorneys at Navigato & Battin are here to help.